Gurule v. Comm'r

2015 Tax Ct. Memo LEXIS 81

• Court: United States Tax Court
• Decided: March 31, 2015
• Docket: Docket No. 13323-13L
• Status: Unpublished

Opinion

KEVIN R. GURULE AND DAWN M. GURULE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Gurule v. Comm'r

Docket No. 13323-13L

United States Tax Court

2015 Tax Ct. Memo LEXIS 81;

March 31, 2015, Filed

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Decision text below is the first available text from the court; it has not been editorially reviewed by LexisNexis. Publisher's editorial review, including Headnotes, Case Summary, Shepard's analysis or any amendments will be added in accordance with LexisNexis editorial guidelines.

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Docket No. 13323-13L. Filed March 31, 2015.

Kevin R. Gurule and Dawn M. Gurule, pro sese.

John Schmittdiel and Jeremy J. Eggerth, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

MARVEL, Judge: In a Notice of Determination Concerning Collection

Action(s) Under Section 6320 and/or 63301 (notice of determination), respondent

1Unless otherwise indicated, all section references are to the Internal Revenue Code (Code) as amended and in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure.

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[*2] sustained the proposed collection by levy of petitioners' unpaid Federal

income tax for taxable year 2009. The issue for decision is whether respondent

abused his discretion in sustaining the proposed levy. Because we are unable to

determine on the record before us whether respondent abused his discretion, we

will remand to the Internal Revenue Service (IRS) Appeals Office for further

proceedings.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulated

facts and facts drawn from stipulated exhibits are incorporated herein by this

reference. Petitioners resided in Minnesota when they petitioned this Court.

I. Background

Petitioners are husband and wife. Mr. Gurule has an associate's degree in

aviation electronics and a bachelor's degree in business management. He worked

for General Mills for 18 years, beginning as a technician and then moving up in

the company. His job required him to move several times, most recently from

Minnesota to Missouri in 2009. Each time his family moved with him. Mr.

Gurule lost his job three months after petitioners moved to Missouri. The family

moved back to Minnesota, and after four to five months of unemployment Mr.

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[*3] Gurule found a job at the manufacturing facility of a grocery chain. He was

working there on the date of the trial in this case.

Mrs. Gurule has a severe neurological condition that causes her to suffer

seizures and has prevented her from working. She has had brain surgery, takes

medication, and has many doctor visits per year because of her medical condition.

Petitioners' middle and youngest sons continued to reside with them

throughout the various moves. Their middle son was in an accident as a child and

suffered a brain injury. He had medical problems throughout his life as a result of

the injury. Tragically, petitioners' middle son passed away in August 2013 from

these medical problems. Petitioners have not yet been able to place his ashes in a

mausoleum because doing so would cost between $7,000 and $10,000 and they are

unable to pay the cost.

Petitioners owned a home in Minnesota. When they moved to Missouri in

2009, they put the Minnesota home up for sale and were in the process of buying a

house in Missouri. Mr. Gurule took distributions from a section 401(k) plan

account he maintained with Great West Retirement for the downpayment, but

petitioners were not able to purchase the house after Mr. Gurule lost his job. The

section 401(k) plan account distributions generated the underlying tax liability in

this case. After petitioners moved back to Minnesota, they lived in the Minnesota

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[*4] house until December 2012. At that time the mortgage on petitioners'

Minnesota home was the subject of a foreclosure proceeding, and they moved.

Mr. Gurule had two loans from his section 401(k) plan account outstanding

at the time of the foreclosure. In January 2013 Mr. Gurule took out another loan

from his section 401(k) plan account (third section 401(k) plan account loan)

because petitioners had unexpected expenses after the foreclosure, including

moving expenses, a security deposit, and the first month's rent for a new

residence. Mr. Gurule's earnings statements from 2012 show that amounts

between $332.88 and $403.56 were deducted from his biweekly paycheck to pay

back the first two section 401(k) plan account loans. The third section 401(k) plan

account loan increased his biweekly payroll deduction to $536.24.2 In or around

March 2013 Mr. Gurule obtained funds to pay petitioners' son's medical expenses

by taking out another section 401(k) plan account loan (fourth section 401(k) plan

account loan). This increased Mr. Gurule's biweekly payroll deduction to $622.3

2In a letter to respondent Mr. Gurule stated that the third sec. 401(k) plan account loan increased his payroll deduction to "$536.24 per month coming out of each paycheck." This statement appears to have been incorrect because, as petitioners' Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, and Mr. Gurule's earnings statements in the administrative record show, he was paid biweekly.

3In a letter to respondent Mr. Gurule stated that the fourth sec. 401(k) plan (continued...)

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[*5] After petitioners' middle son passed away in August 2013, Mr. Gurule took

out a fifth section 401(k) plan account loan (fifth section 401(k) plan account

loan) to pay for his son's funeral services. Mr. Gurule's earnings statements for

February 2014 show that this additional loan increased the biweekly payroll

deduction to $694.70.

II. The Liability and the Collection Process

Petitioners timely filed a joint Form 1040, U.S. Individual Income Tax

Return, for taxable year 2009. On May 2, 2011, respondent sent a Notice CP2000

to petitioners proposing adjustments to their 2009 Federal income tax on the basis

of third-party information returns showing that Mr. Gurule had section 401(k) plan

account distributions during the year. The record is unclear as to whether

respondent sent petitioners a statutory notice of deficiency as required under

section 6213(a). In November 2011 respondent assessed additional tax of $36,516

and an accuracy-related penalty of $6,756. Petitioners did not pay the assessed

amounts, and respondent's Automated Collection System Section issued a Letter

3(...continued)

account loan increased the repayment to "$622.00 per month coming out of each paycheck". This statement is incorrect because Mr. Gurule was paid biweekly. See supra note 2.

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[*6] 1058, Notice of Intent to Levy and Notice of Your Right to a Hearing, on

May 7, 2012.4

Petitioners timely requested a section 6330 hearing. In their request, they

indicated that they could not pay the balance and stated: "Collection will cause a

hardship. I need an offer in compromise or installment agreement, penalties

should be cancelled for reasonable cause."

Petitioners' case was assigned to Settlement Officer Lori Degiovanni in the

IRS Appeals Office. On August 21, 2012, petitioners submitted to Settlement

Officer Degiovanni a Form 656, Offer in Compromise, a Form 433-A, and

supporting financial information. The offer-in-compromise (OIC) request, in

which petitioners proposed to settle their tax liability for $950 paid over five

months, was based on doubt as to collectibility.

The Appeals Office retained jurisdiction over the case while the IRS'

Centralized Offer in Compromise (COIC) Unit researched petitioners' OIC request

and verified their financial information. By letter dated November 28, 2012, the

COIC Unit informed petitioners that it could not accept the proposed OIC but

indicated a willingness to receive additional information. In response, petitioners

4The Letter 1058 also stated that petitioners were liable for an addition to tax for late payment pursuant to sec. 6651(a)(3).

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[*7] sent the COIC Unit a letter dated January 9, 2013, and financial

documentation. The letter explained the family's medical problems, the

foreclosure proceedings, and the third section 401(k) plan account loan. The

mortgage on the Minnesota house was foreclosed upon and Mr. Gurule had taken

out the third section 401(k) plan account loan after petitioners submitted their

OIC. The financial information petitioners sent included documentation of the

moving expenses and the medical expenses.

On January 29, 2013, the COIC Unit preliminarily rejected petitioners'

proposed OIC because it contended that petitioners could fully pay the liability on

the basis of their calculated net realizable equity and future income.5 The COIC

Unit determined petitioners' net realizable equity to be $19,342.80, which it

computed by adding the total value of petitioners' bank account balance of $1,700,

Mr. Gurule's section 401(k) plan account net realizable equity of $16,442.80, and

vehicle net realizable equity of $1,200. The COIC Unit calculated the net

5The term "net realizable equity" is defined as "quick sale value * * * less amounts owed to secured lien holders with priority over the [F]ederal tax lien". Internal Revenue Manual (IRM) pt. 5.8.5.4.1(1) (Oct. 22, 2010). The term "quick sale value" used in the definition of "net realizable equity" is defined to mean "an estimate of the price a seller could get for the asset in a situation where financial pressures motivate the owner to sell in a short period of time", usually 80% of the fair market value of the asset. Id. pt. 5.8.5.4.1(2) and (3); see Lane v.Commissioner, T.C. Memo. 2013-121.

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[*8] realizable equity of Mr. Gurule's section 401(k) plan account by reducing the

fair market value of $71,704 by 30% to account for Federal income tax and then

subtracting a loan balance of $33,750. The COIC Unit did not consider Mr.

Gurule's then-existing third section 401(k) plan account loan in calculating the

section 401(k) plan account's net realizable equity.

The COIC Unit determined petitioners' monthly gross income, monthly

expenses, and monthly net income to be $8,663, $8,225, and $438, respectively.

On the basis of petitioners' net realizable equity of $19,342.80 and monthly net

income of $438 over 110 months, the COIC Unit determined that petitioners could

fully satisfy their tax liability, which then totaled $46,657.77.

The COIC Unit then transferred the OIC case file to the Appeals Office for

a final determination. After receiving the case file, Settlement Officer Degiovanni

prepared an asset equity table and an income and expense table, which showed the

following:

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[*9]Asset Equity Table1

Fair

market Percent Quick sale Appeals

AssetvaluereducedvalueEncumbrancesequity

Checking

acct. $1,700 -0- -0- -0- -0-

Sec. 401(k)

plan acct. 269,079 3-0- $48,355 $34,097 $14,258

Vehicle 1 1,500 20% 1,200 -0- -0-

Total 14,258

1Categories without a value in any column have been omitted.

2The record does not explain why the COIC Unit and Settlement Officer Degiovanni assigned a different fair market value to Mr. Gurule's sec. 401(k) plan account. The notice of determination makes clear that the difference was not a result of Settlement Officer Degiovanni's taking the third sec. 401(k) plan account loan into consideration. See infra pp. 30-31.

3Though Settlement Officer Degiovanni's chart shows 0% reduced, the quick sale value implies that she reduced the fair market value of the sec. 401(k) plan account by 30%.

Income Table

ItemClaimed1 Appeals

Gross wages $6,694 $8,202

Social Security -0- 459

Total 6,694 8,661

1This column reflects the income that petitioners claimed on their Form 433-A.

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[*10]Expense Table

ExpenseClaimed1 Appeals

National standard $1,021 $1,450

Housing and utilities 2,197 2,581

Vehicle ownership 420 409

Vehicle operating 632 432

Taxes (on income) 1,427 1,427

Health insurance 287 287

Out-of-pocket health care 550 550

Life insurance 130 130

Other secured debt -0- -0-

Additional vehicle operating -0- 400

Total 26,664 7,666

1This column reflects the expenses that petitioners claimed on their Form 433-A.

2Petitioners' Form 433-A incorrectly stated that the expenses totaled $6,644. The correct total is $6,664.

Settlement Officer Degiovanni did not allow a monthly expense for Mr. Gurule's

payroll deduction related to the section 401(k) plan account loans at that time.

On the basis of these calculations, Settlement Officer Degiovanni found that

petitioners had monthly disposable income and a reasonable collection potential6

(RCP) of $995 and $26,198, respectively, and she therefore preliminarily

determined that petitioners would be able to pay the tax liability in full. On March

6Reasonable collection potential is generally the sum of a taxpayer's net realizable equity and future income. IRM pt. 5.8.4.3.1 (June 1, 2010); see infra pp. 27-28.

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[*11] 1, 2013, Settlement Officer Degiovanni sent petitioners a letter explaining

her preliminary determination and scheduling a telephone call for April 9, 2013.

The letter also stated that petitioners could provide additional information by

March 22, 2013.

In response to the letter, petitioners sent Settlement Officer Degiovanni

additional financial information, including a pay stub, rent checks, utility bills, and

medical bills. Mr. Gurule also included a letter explaining certain housing and

vehicle expenses and the fourth section 401(k) plan account loan. Although he

stated in the letter that the fourth section 401(k) plan account loan had increased

his payroll deduction to $622, petitioners did not provide an updated earnings

statement to this effect. The pay stub that petitioners sent was current as of

February 2013 and reflected only the first three section 401(k) plan account loans.

Mr. Gurule and Settlement Officer Degiovanni spoke on the telephone on

April 11, 2013. Following the telephone call, Settlement Officer Degiovanni

recalculated petitioners' expenses as follows:

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[*12] ExpenseClaimed1 Appeals

National standard $1,021 $1,465

Housing and utilities 3,051 2,778

Health insurance 287 2287

Out-of-pocket health care 550 3626

Life insurance 130 130

Sec. 401(k) plan acct. loan 622 536

Total 46,664 8,490

1This column reflects the expenses that petitioners claimed during the sec. 6330 hearing.

2Although Mr. Gurule stated that his taxes and medical insurance costs had increased, Settlement Officer Degiovanni did not adjust these amounts because she determined that the difference was netted out by increased wages and smaller contributions to a healthcare flexible spending account.

3Settlement Officer Degiovanni increased petitioners' allowable medical expenses to $626 per month, which she calculated by totaling all of the medical bills in the record and dividing by 15 months.

4Settlement Officer Degiovanni's calculations and the notice of determination show an incorrect total of $6,664. The correct total is $8,140.

As the table above reflects, Settlement Officer Degiovanni included a part

of Mr. Gurule's payroll deduction for the section 401(k) plan account loans as an

expense when she recalculated petitioners' expenses. She allowed a $536 monthly

expense for the section 401(k) plan account loans because Mr. Gurule's most

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[*13] recent earnings statement "shows $536 being deducted". Mr. Gurule was

paid biweekly, but Settlement Officer Degiovanni allowed only $536 as Mr.

Gurule's monthly expense for the section 401(k) plan account loans.

Settlement Officer Degiovanni did not reduce the net realizable equity in

Mr. Gurule's section 401(k) plan account by the amount of the third or fourth

section 401(k) plan account loan. As the case activity record explains, because

petitioners "chose to borrow an additional amount against the equity in the IRA,

knowing that they owed [F]ederal taxes, we will not now consider the additional

loan encumbrance when figuring RCP. This could also be considered a dissipated

asset." We construe this statement to mean that Settlement Officer Degiovanni

considered the additional loan amounts to be dissipated assets.

On the basis of these adjustments, Settlement Officer Degiovanni

determined that petitioners' RCP was $16,310 and their monthly net income was

$171. She therefore rejected petitioners' proposed OIC of $950. She offered

petitioners the choice of either increasing their OIC or accepting an installment

agreement with a payment of $171 per month and the filing of a notice of Federal

tax lien. She also informed petitioners that they did not meet the requirements for

currently not collectible status.

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[*14] On April 18, 2013, Mr. Gurule called Settlement Officer Degiovanni to

propose an installment agreement with a payment of $120 per month. Petitioners

felt this was the maximum they could pay because this was the amount left in their

bank account at the end of each month. Settlement Officer Degiovanni did not

accept this amount because her financial analysis showed monthly net income of

$171. Petitioners alternatively offered to increase their OIC to $6,100. Settlement

Officer Degiovanni did not accept this offer because she determined that

petitioners' RCP exceeded this amount.

Respondent sent petitioners a notice of determination on May 13, 2013,

sustaining the proposed levy. The notice of determination explained the Appeals

Office's final calculations of petitioners' net realizable equity, monthly income

and expenses, and RCP. The notice of determination further stated: "We will not

consider additional encumbrances against your 401(k), which you chose to take

when you were aware that you had an outstanding tax liability."

Because petitioners' two OIC proposals were below the calculated RCP, the

notice of determination sustained the proposed collection action by levy. The

notice of determination also stated that the applicable law, regulations, and

procedures had been followed and that the Appeals Office balanced the need for

efficient collection with petitioners' concern that the collection action be no more

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[*15] intrusive than necessary. However, the notice of determination did not

address petitioners' claim of financial hardship, which they brought to the

attention of the Appeals Office with their section 6330 hearing request.

Settlement Officer Degiovanni's case activity report likewise does not mention the

financial hardship claim.

Petitioners timely filed a petition disputing the notice of determination on

June 12, 2013.7 After the filing of the petition, petitioners' middle son passed

away, and Mr. Gurule took out the fifth section 401(k) plan account loan to pay

for the funeral services.

On March 11, 2014, petitioners sent respondent an updated but unsigned

Form 433-A showing increased expenses that exceeded their monthly income by

$250. Petitioners also sent respondent a printout that shows, as of April 8, 2014,

that Mr. Gurule was eligible to take out an additional $4,753.33 from his section

401(k) plan account as a loan. If he took out an additional loan from the section

7Petitioners initially elected to have this case treated under small tax case procedures. Seesec. 7463(f)(2). Before trial respondent requested by oral motion that the "S" designation be removed because, at the time the notice of determination was issued, petitioners' total balance slightly exceeded the $50,000 cap on small tax cases. Seesec. 7463(a)(1), (d); Leahy v. Commissioner, 129 T.C. 71, 76 (2007). The Court granted respondent's oral motion.

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[*16] 401(k) plan account in this amount, his biweekly loan repayment would

increase to $816.67.

OPINION

I. Section 6330 Hearing

Under section 6331(a), the Secretary may levy upon property and property

rights of a taxpayer liable for tax if the taxpayer fails to pay the tax within 10 days

after notice and demand for payment. Section 6330(a) provides that no levy may

be made on any property or right to property of any person unless the Secretary

has notified such person in writing of the right to a hearing before the levy is

made. Section 6330(a) and (b) and section 6331(d) provide that the Secretary

must give at least 30 days' written notice to the taxpayer of his intent to levy and

must send the taxpayer written notice of the taxpayer's right to a hearing before

the IRS Appeals Office at least 30 days before any levy begins.

If a taxpayer requests a hearing in response to a notice of intent to levy

pursuant to section 6330, a hearing shall be held before an impartial officer or

employee of the Appeals Office. Sec. 6330(b)(1), (3). At the hearing the taxpayer

may raise any relevant issue, including appropriate spousal defenses, challenges to

the appropriateness of the collection action, and collection alternatives. Sec.

6330(c)(2)(A). A taxpayer is precluded from contesting the existence or amount

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[*17] of the underlying tax liability unless the taxpayer did not receive a notice of

deficiency for the liability in question or did not otherwise have an opportunity to

dispute the liability. Sec. 6330(c)(2)(B); see Sego v. Commissioner, 114 T.C. 604,

609 (2000). The phrase "underlying tax liability" includes the tax deficiency,

additions to tax, and statutory interest. Katz v. Commissioner, 115 T.C. 329, 339

(2000).

In determining whether to sustain the proposed collection action, the

settlement officer must take into account verification of the Secretary's

compliance with "the requirements of any applicable law or administrative

procedure", the issues that the taxpayer raised at the hearing, and whether the

collection action "balances the need for the efficient collection of taxes with the

legitimate concern of the * * * [taxpayer] that any collection action be no more

intrusive than necessary." Sec. 6330(c)(1), (3); e.g., Goza v. Commissioner, 114

T.C. 176, 180-181 (2000). The Court has jurisdiction to review this

determination. Sec. 6330(d)(1); e.g., Sego v. Commissioner, 114 T.C. at 609.

Where the underlying tax liability is properly at issue, the Court reviews the

determination de novo.E.g., Goza v. Commissioner, 114 T.C. at 181-182. Where

the validity of the underlying tax is not properly at issue, the Court reviews the

Commissioner's determination for abuse of discretion. E.g., Sego v.

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[*18]Commissioner, 114 T.C. at 610. The Appeals Office abuses its discretion

when its exercise of discretion is arbitrary, capricious, or without sound basis in

fact or law. Murphy v. Commissioner, 125 T.C. 301, 308, 320 (2005), aff'd, 469

F.3d 27 (1st Cir. 2006); Woodral v. Commissioner, 112 T.C. 19, 23 (1999).

II. Section 6330(c)(1) Requirements

Pursuant to section 6330(c)(1), the settlement officer shall "obtain

verification from the Secretary that the requirements of any applicable law or

administrative procedure have been met." When the IRS has assessed additional

tax from its determination of a deficiency in the income tax that married taxpayers

reported on a joint return, the settlement officer must verify each of the following:

(1) either that the Commissioner mailed a valid notice of deficiency to the

taxpayers at their last known address (or addresses) or each spouse signed an

appropriate waiver, secs. 6212(b), 6213; (2) that the Commissioner made a valid

assessment, sec. 6203; (3) that the Commissioner issued notice and demand, sec.

6303; (4) that the taxpayers did not pay the liability, sec. 6331(a); and (5) that the

Commissioner issued to the taxpayers notice of intent to collect the outstanding

liability by levy and of the taxpayers' right to a hearing, sec. 6330(a); see Ron

Lykins, Inc. v. Commissioner, 133 T.C. 87, 96-97 (2009); Manko v.

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[*19]Commissioner, 126 T.C. 195, 203 (2006); Freije v. Commissioner, 125 T.C.

14, 35 (2005); Marlow v. Commissioner, T.C. Memo. 2010-113.

The settlement officer must verify that these requirements have been

satisfied. Sec. 6330(c)(1), (3)(A); Hoyle v. Commissioner, 131 T.C. 197, 201-202

(2008), supplemented by136 T.C. 463 (2011). If they have not, collection cannot

proceed and the settlement officer cannot sustain the proposed collection action.

See Med. Practice Solutions, LLC v. Commissioner, T.C. Memo. 2009-214. The

Court reviews the Appeals Office's verification under section 6330(c)(1) without

regard to whether the taxpayers raised these issues during the section 6330

hearing. Hoyle v. Commissioner, 131 T.C. at 202-203.

The IRS was required to send Mr. and Mrs. Gurule a notice of deficiency

before assessing tax. Seesec. 6213(a); see also Commissioner v. Shapiro, 424

U.S. 614, 616-617 (1976); Manko v. Commissioner, 126 T.C. at 200-201; Freije v.

Commissioner, 125 T.C. at 34-37. However, a copy of a notice of deficiency is

not in the record. The notice of determination does not say that the Appeals Office

verified the mailing of a notice of deficiency. This is especially worrisome

because the notice of determination specifically states that the settlement officer

verified each of the other statutory requirements. Settlement Officer Degiovanni's

case activity record states that she verified that the Letter 1058 was sent to

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[*20] petitioners and other procedural requirements were satisfied, but it does not

indicate that she verified that an appropriate notice of deficiency was mailed to

petitioners at their last known address.

The only possible reference to a notice of deficiency appears in the case

history transcript, which has an entry for a "STAT NOTICE" on August 1, 2011.

The case history transcript does not indicate when, if ever, the Commissioner

mailed this notice to petitioners. Because multiple notices required by applicable

Code provisions and related regulations must be sent to taxpayers before and

during the collection process, the Court cannot tell whether the "STAT NOTICE"

entry refers to the mailing of a notice of deficiency. On the basis of the limited

record before us, the Court cannot determine whether Settlement Officer

Degiovanni verified that the IRS properly mailed a notice of deficiency to

petitioners. We may remand when the Appeals officer did not develop a record

sufficient for judicial review. See Hoyle v. Commissioner, 131 T.C. at 204-205;

Churchill v. Commissioner, T.C. Memo. 2011-182. Accordingly, we will remand

this case to the Appeals Office for it to clarify the record as to whether it verified

that a notice of deficiency was properly sent to petitioners at their last known

address and, if so, on what it relied to do so.

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[*21]III.Section 6330(c)(2) Requirements

Once the settlement officer verifies that the applicable law and

administrative procedures have been followed, the settlement officer must

consider any relevant issue that the taxpayer has raised relating to the unpaid tax

or the proposed levy. Sec. 6330(c)(2); see Sego v. Commissioner, 114 T.C. at

608-609. Petitioners argue that Settlement Officer Degiovanni did not properly

address the issues they raised in the section 6330 hearing. We cannot determine

on the basis of the record before us whether the settlement officer properly

considered the issues petitioners raised in the section 6330 hearing.

A. Economic Hardship and Necessary Living Expenses

Petitioners assert that the proposed collection action should not proceed

because they are experiencing economic hardship and the equity in their only

meaningful asset, Mr. Gurule's section 401(k) plan account, is needed as a source

for loans to pay necessary living expenses. Section 6343(a)(1)(D) directs the

Commissioner to release a levy upon all, or part of, a taxpayer's property if he

determines that a levy would cause economic hardship to the taxpayer. A levy

causes "economic hardship" when the taxpayer would be unable to pay reasonable

basic living expenses, according to the taxpayer's complete and current financial

information, if a levy were made. Washington v. Commissioner, 120 T.C. 137,

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[*22] 149-150 (2003); sec. 301.6343-1(b)(4)(i), Proced. & Admin. Regs.; seesec.

301.6343-1(b)(4)(ii), Proced. & Admin. Regs. (outlining what constitutes basic

living expenses and including any "factor that the taxpayer claims bears on

economic hardship and brings to the attention of the director"). By extension, the

settlement officer in a section 6330 hearing may not proceed with a proposed levy

when a taxpayer establishes that it would create an economic hardship because

section 6343 would require the levy's immediate release. Vinatieri v.

Commissioner, 133 T.C. 392, 400, 402 (2009) ("Proceeding with the levy would

be unreasonable because section 6343 would require its immediate release, and the

determination to do so was arbitrary."). Instead, the settlement officer "must

consider an alternative." Id. at 401.

Beyond this statutory requirement, the IRS has implemented its own

procedures that restrict the levying upon retirement accounts because they are

specifically intended for a taxpayer's future welfare. The Internal Revenue

Manual (IRM) has a three-step procedure for levying upon retirement accounts

and instructs IRS employees to levy upon these accounts only if (1) a taxpayer's

conduct has been flagrant8 and (2) the taxpayer does not depend on the funds in

8Examples of flagrant conduct include, among others, (1) reliance on frivolous arguments, (2) voluntary contributions to retirement accounts when tax

(continued...)

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[*23] the account to pay necessary living expenses, taking into account any special

circumstances such as extraordinary expenses.9 IRM pt. 5.11.6.2 (Dec. 2, 2011);

see Wadleigh v. Commissioner, 134 T.C. 280, 294-296 (2010) (discussing the

IRM provision that addresses the Commissioner's ability to levy upon retirement

accounts).

Petitioners wrote "[c]ollection will cause a hardship" on their section 6330

hearing request and provided documents supporting this claim. Settlement Officer

Degiovanni was aware that Mrs. Gurule and petitioners' middle son suffered from

severe medical conditions that left them with high medical bills every month.

Petitioners had borrowed against Mr. Gurule's section 401(k) plan account, their

8(...continued)

is due, (3) conviction for tax evasion for the liability, (4) assessment of a fraud penalty with respect to the liability, and (5) a demonstrated pattern of uncooperative or unresponsive behavior. IRM pt. 5.11.6.2(6) (Dec. 2, 2011).

9The Commissioner's internal procedures, as reflected in the IRM, do not have the force of law, and deviation from them does not necessarily render the Commissioner's action invalid.Vallone v. Commissioner, 88 T.C. 794, 807-808 (1987). Nevertheless, the IRM can be persuasive authority, see Atchison v.Commissioner, T.C. Memo. 2009-8, and a review of relevant IRM provisions is instructive in ascertaining the procedures the IRS expects its employees to follow, see Wadleigh v. Commissioner, 134 T.C. 280, 294 & n.13 (2010) (reviewing relevant IRM provisions to determine procedures that IRS employees are expected to follow when deciding whether to levy upon a taxpayer's retirement account); see also Fairlamb v. Commissioner, T.C. Memo. 2010-22 (stating that a settlement officer's "determination * * * [that is] based wholly on misapplication of internal procedures, cannot be said to have a sound basis in law or fact").

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[*24] only asset with a positive net realizable equity according to the notice of

determination, to pay basic living expenses such as moving and medical expenses.

Petitioners took out two of the five section 401(k) plan account loans during the

course of the section 6330 hearing and promptly notified Settlement Officer

Degiovanni by letter after each loan. The chronic nature of the medical conditions

suggested that medical bills would continue to accumulate. Yet the notice of

determination and Settlement Officer Degiovanni's case notes do not show that

the Appeals Office ever considered, much less made a determination about,

petitioners' economic hardship claim. The administrative record also does not

show that Settlement Officer Degiovanni considered or followed the three-step

process for levying upon retirement accounts pursuant to the IRM even though she

was aware that petitioners were using the section 401(k) plan account to pay

necessary living expenses.10 On the basis of the record before us, we cannot

determine whether Settlement Officer Degiovanni abused her discretion by

10The notice of determination does not specifically state that petitioners' sec. 401(k) plan account will be levied upon, yet this was the only asset with positive net equity listed in the notice of determination's asset equity table. Of petitioners' total calculated RCP of $16,310, only $2,052 was attributable to future income while the remaining $14,258 was attributable to petitioners' sec. 401(k) plan account.

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[*25] upholding the proposed levy notwithstanding petitioners' economic hardship

claim.

B. Petitioners' Proposed Collection Alternatives

Assuming arguendo that petitioners' economic hardship claim does not bar

collection action entirely, we address Settlement Officer Degiovanni's

determination to reject petitioners' proposed collection alternatives. Petitioners

first proposed an OIC of $950 and later increased the amount to $6,100 after the

Appeals Office rejected the first offer. Petitioners also proposed an installment

agreement with a payment of $120 per month. Settlement Officer Degiovanni

rejected the offers because they fell below petitioners' calculated RCP (for the

OIC) and monthly net income (for the installment agreement). Petitioners contend

that the settlement officer incorrectly calculated their RCP and/or monthly net

income by either (1) not reducing the section 401(k) plan account's net realizable

equity by the amounts of the additional loans petitioners took out during the

section 6330 hearing or (2) failing to reduce petitioners' monthly income by the

amounts of the loan payments to the section 401(k) plan account.11 Petitioners

11In the petition, petitioners stated that Settlement Officer Degiovanni would not allow all of their current medical expenses in the calculation of their monthly net income. Settlement Officer Degiovanni allowed petitioners' medical expenses of $550 as stated on their Form 433-A plus an additional $76 per month on the

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[*26] also assert that their RCP has changed since the time of the settlement

officer's determination because of their middle son's death.

1. Collection Alternatives Generally

During the course of a section 6330 hearing taxpayers may propose

collection alternatives such as an OIC or an installment agreement. Sec.

6330(c)(2)(A)(iii); Giamelli v. Commissioner, 129 T.C. 107, 112 n.3 (2007).

Pursuant to section 7122(a) the Secretary may compromise any civil or

criminal case arising under the internal revenue laws before its referral to the

Department of Justice. Section 7122(d) authorizes the Secretary to prescribe

guidelines for officers and employees of the IRS to determine whether an OIC is

adequate and should be accepted. Accordingly, we generally uphold the rejection

of an OIC when the Appeals Office has followed the IRM. See, e.g., Churchill v.

Commissioner, T.C. Memo. 2011-182, 102 T.C.M. (CCH) 116, 117 (2011);

11(...continued)

basis of medical records they provided during the sec. 6330 hearing. Because the administrative record demonstrates that Settlement Officer Degiovanni allowed all of the medical expenses that petitioners claimed, it appears that the Appeals Office did not abuse its discretion in considering this medical expense issue. SeeJohnson v. Commissioner, T.C. Memo. 2007-29 (holding that the Appeals Office properly considered the taxpayer's current medical expenses in calculating RCP when it allowed the full amount of medical expenses that he had claimed), aff'd inrelevant part sub nom. Keller v. Commissioner, 568 F.3d 710, 718 (9th Cir. 2009). Petitioners conceded this issue at trial.

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[*27]Atchison v. Commissioner, T.C. Memo. 2009-8, 97 T.C.M. (CCH) 1034,

1036 (2009).

Petitioners do not challenge the existence or amount of the underlying

liability. Their challenge focuses on their claimed inability to pay and their

difficult financial circumstances.

The Commissioner may accept an OIC of a Federal tax debt on the grounds

of "Doubt as to collectibility", among others. Sec. 301.7122-1(b)(1), (2), and (3),

Proced. & Admin. Regs. In making a determination regarding collectibility, the

Secretary must calculate a taxpayer's ability to pay. Id. para. (c)(2). Generally,

this type of OIC will be accepted only if the amount offered equals or exceeds the

taxpayer's RCP; i.e., the amount that the IRS could collect through other means

such as administrative and judicial collection remedies. Rev. Proc. 2003-71, sec.

4.02(2), 2003-2 C.B. 517, 517; see IRM pt. 5.8.1.1.3 (Mar. 16, 2010). The IRM

sets forth procedures for analyzing a taxpayer's financial condition to determine

the taxpayer's RCP. See IRM pt. 5.8.5.1 (Sept. 23, 2008). A taxpayer's RCP is

generally defined as the sum of (1) the taxpayer's net realizable equity in assets

(net realizable equity) and (2) the amount collectible from the taxpayer's expected

future income after allowing for payment of necessary living expenses. Id. pt.

5.8.4.3.1 (June 1, 2010); seesec. 301.7122-1(c)(2)(i), Proced. & Admin. Regs.

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[*28] (stating that the Secretary is required to "permit taxpayers to retain sufficient

funds to pay basic living expenses").

Sec. 6159(a) authorizes the Secretary to enter into an installment agreement

upon determining that the proposed agreement would facilitate full or partial

collection of the taxpayer's liability. An installment agreement generally does not

reduce the amount of taxes, interest, or penalties that the taxpayer owes but rather

allows the taxpayer to pay the liability over time. Seesec. 301.6159-1(c)(1)(ii),

Proced. & Admin. Regs. The decision to accept or reject installment agreements

lies within the discretion of the Commissioner. Thompson v. Commissioner, 140

T.C. 173, 179 (2013) (citing section 301.6159-1(a), (c)(1)(i), Proced. & Admin.

Regs.). If a settlement officer follows all statutory and administrative guidelines

and provides a reasoned and balanced decision, the Court will not reweigh the

equities. Id.; Lipson v. Commissioner, T.C. Memo. 2012-252, at *9 (citing Fifty

Below Sales & Mktg., Inc. v. United States, 497 F.3d 828, 830 (8th Cir. 2007)).

IRM pt. 5.14.1.4(4) (June 1, 2010) states: "Installment agreements must

reflect taxpayers' ability to pay on a monthly basis throughout the duration of

agreements." A taxpayer's ability to pay is determined by comparing his monthly

income to allowable expenses. Thompson v. Commissioner, 140 T.C. at 179-180

(discussing allowable monthly expenses); Friedman v. Commissioner, T.C. Memo.

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[*29] 2013-44, at *9. In reviewing for abuse of discretion the Court ordinarily

does not recalculate a taxpayer's ability to pay nor substitute its judgment for that

of the settlement officer. See, e.g., Boulware v. Commissioner, T.C. Memo. 2014-

80.

2. Settlement Officer Degiovanni's Calculation of Petitioners' Ability To Pay

Petitioners contend that Settlement Officer Degiovanni did not properly

account for Mr. Gurule's section 401(k) plan account loans in calculating their

ability to pay, whether by reducing the net realizable equity of the section 401(k)

plan account or by reducing their monthly net income by the amounts of the loan

payments. Respondent contends that petitioners are not entitled to any adjustment

to their monthly net income because petitioners are essentially repaying a loan to

themselves and allowing an adjustment would result in double counting the

section 401(k) plan account encumbrances. Respondent further avers that

petitioners may not receive a reduction in the net realizable equity of the section

401(k) plan account because the additional loans Mr. Gurule took are "dissipated

assets".

Initially, before Mr. Gurule took out the additional loans, Settlement Officer

Degiovanni calculated the net realizable equity of Mr. Gurule's section 401(k)

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[*30] plan account by reducing its cash value by encumbrances (the first two

section 401(k) plan account loans) and tax consequences. See IRM pt. 5.8.5.9

(Oct. 22, 2010). However, Settlement Officer Degiovanni determined not to

reduce the section 401(k) plan account's net realizable equity by the amounts of

the two additional loans because "[w]e will not consider additional encumbrances

against your 401(k), which you chose to take when you were aware that you had

an outstanding tax liability."

Although the settlement officer did not further reduce the net realizable

equity of the section 401(k) plan account, she allowed a $536 monthly expense for

Mr. Gurule's section 401(k) plan account loan payments. This allowance reduced

petitioners' calculated monthly net income. Respondent contends that this

adjustment favored petitioners because ordinarily loan payments to a retirement

account are not allowable as an expense in calculating RCP, as retirement account

loan payments are essentially moving a taxpayer's money from one account to

another. See id. pt. 5.8.5.20.4(9) (Oct. 22, 2010). However, Settlement Officer

Degiovanni determined it was appropriate to include the loan payments in

petitioners' RCP because the loans originated, at least in part, to pay necessary

medical expenses.

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[*31] According to the case activity report, Settlement Officer Degiovanni

allowed petitioners a monthly expense of $536 for the loan payments on the basis

of Mr. Gurule's earnings statement that petitioners provided.12 However, the

record establishes that Mr. Gurule was paid biweekly for all relevant periods. The

earnings statements on which Settlement Officer Degiovanni relied reflected

biweekly earnings and not monthly earnings.

In sum, after Mr. Gurule took out the third section 401(k) plan account loan,

Settlement Officer Degiovanni did not adjust the net realizable equity of the

section 401(k) plan account for the balance remaining on the section 401(k) plan

account loans or adjust petitioners' monthly net income by the full amount of the

loan payment per month. Thus, it appears that Settlement Officer Degiovanni may

have made a material error in calculating petitioners' RCP.

In at least one instance, the IRM sanctions the use of an inflated RCP for

public policy reasons. A dissipated asset is any asset, liquid or illiquid, that has

12Although petitioners told Settlement Officer Degiovanni that Mr. Gurule's loan payment had increased from $536 to $622 "coming out of each paycheck", she did not abuse her discretion by relying on the then-outdated earnings statement because petitioners did not provide any updated documents showing the new amount. See Etkin v. Commissioner, T.C. Memo. 2005-245 (holding that an Appeals officer did not abuse his discretion when taxpayers did not provide updated financial information showing a change in circumstances); see also Orumv. Commissioner, 123 T.C. 1, 13 (2004), aff'd, 412 F.3d 819 (7th Cir. 2005).

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[*32] been sold, transferred, or spent on nonpriority items or debts so that it is no

longer available to pay a tax liability. Johnson v. Commissioner, 136 T.C. 475,

487 (2011), aff'd without published opinion, 502 Fed. Appx. 1 (D.C. Cir. 2013).

The IRM instructs that a dissipated asset may be included in the RCP calculation

even though it is no longer at the taxpayer's disposal as a way to discourage

delinquent taxpayers from squandering money instead of paying taxes. Id.; IRM

pt. 5.8.5.16(3) (Oct. 22, 2010); see, e.g., Tucker v. Commissioner, 676 F.3d 1129,

1135 (D.C. Cir. 2012), aff'g135 T.C. 114 (2010), and aff'gT.C. Memo. 2011-67.

Settlement Officer Degiovanni's case notes indicate that she did not reduce

petitioners' calculated RCP by the total amount of the additional section 401(k)

plan account loans because she considered that amount to be a dissipated asset.

The IRM states that dissipated assets should not automatically be included

in the RCP calculation. See IRM pt. 5.8.5.16(1); id. pt. 8.23.3.3.2.3(2) (Oct. 14,

2011). The IRM lists factors that the Appeals Office should analyze when

deciding whether to include dissipated assets in the RCP calculation.13 The IRM

13The factors to be evaluated are (1) when the assets were dissipated in relation to the offer submission, (2) whether the assets were used to pay for existing ongoing business operating expenses, (3) when the assets were dissipated in relation to the liability, (4) how the assets were transferred, (5) whether the taxpayer realized any funds from the transfer of assets, (6) how any funds realized from the disposition of assets were used, and (7) the value of the assets and the

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[*33] also states: "When it can be shown through internal research or

substantiation provided by the taxpayer that the funds were needed to provide for

necessary living expenses, these amounts should not be included in the RCP

calculation." Id. pt. 5.8.5.16(5); see also Layton v. Commissioner, T.C. Memo.

2011-194; IRM pt. 8.23.3.3.2.3(5). Further, "[i]nclusion of the value of dissipated

assets must clearly be justified in the case file and documented on the ICS or

AOIC history, as appropriate."14 IRM pt. 5.8.5.16(4), (10).

The administrative record does not establish that Mr. Gurule took out the

additional section 401(k) plan account loans intending to disregard the outstanding

tax liability, see IRM pt. 5.8.5.16(7), or that the loans otherwise qualify as

dissipated assets that should be included in the RCP calculation. In any event,

Settlement Officer Degiovanni's decision to treat the additional loan encumbrance

13(...continued)

taxpayer's interest in those assets. IRM pt. 5.8.5.16(4) (Oct. 22, 2010).

14The IRM instructs the Appeals Office to consider, but does not mandate, including dissipated assets in the RCP calculation when an investigation clearly reveals that assets have been dissipated with a disregard of the outstanding tax liability. IRM pt. 5.8.5.16(7); see also Tucker v. Commissioner, 676 F.3d 1129, 1135-1136 (D.C. Cir. 2012), aff'g135 T.C. 114 (2010), and aff'gT.C. Memo. 2011-67. Examples of when dissipated assets may result in an RCP increase include dissolving an IRA account to pay for a child's wedding or a vacation and selling real estate and gifting the proceeds to family members. IRM pt. 5.8.5.16(7), ex. 1.

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[*34] as a dissipated asset was not clearly justified in the case file. Settlement

Officer Degiovanni included the purported dissipated asset in the RCP calculation,

but it is unclear to what extent she considered petitioners' unique circumstances or

any of the factors that the IRM instructs the Appeals Office to consider. See id. pt.

5.8.5.16(1) ("The value of dissipated assets should not automatically be included

in the calculation of the RCP. Each particular case must be evaluated on its own

merit."); id. pt. 5.8.5.16(4); see also Titsworth v. Commissioner, T.C. Memo.

2012-12, slip op. at 18-19 ("Whether to include dissipated assets in a taxpayer's

RCP is not an automatic determination but must be evaluated on the basis of the

facts and circumstances of each case in the light of certain enumerated factors [in

the IRM]."). The case activity report and the notice of determination summarily

state that this amount is included in the RCP calculation because Mr. Gurule took

out the loans when petitioners knew of their outstanding Federal tax liability.

Especially considering that the subsequent loans appear to have been used to pay

necessary living expenses, we cannot properly review Settlement Officer

Degiovanni's conclusion and evaluate its impact on the Appeals Office's

determination with the cursory explanation in the administrative record. See IRM

pt. 5.8.5.16(4) and (5); see also Jones v. Commissioner, T.C. Memo. 2012-274, at

*32; Tucker v. Commissioner, T.C. Memo. 2011-67 (holding that the RCP

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[*35] calculation should not include the entire amount the taxpayer placed in his

day trading account as a dissipated asset if he later withdrew half the amount to

pay for basic living expenses).

Because the administrative record does not fully and clearly explain

Settlement Officer Degiovanni's treatment of the additional section 401(k) plan

account loans, we cannot determine whether she calculated petitioners' RCP

correctly at the time of the section 6330 hearing. Moreover, Settlement Officer

Degiovanni's calculation of petitioners' ability to pay also affected her

determination to reject petitioners' proposed installment agreement with a

payment of $120 per month. See IRM pt. 5.14.1.4(4). Although we do not

substitute our judgment for that of the Appeals Office in calculating a taxpayer's

ability to pay when the Appeals Office rejects an installment agreement, see, e.g.,

Boulware v. Commissioner, T.C. Memo. 2014-80, we can consider whether the

Appeals Office's decision to reject an installment agreement was the result of a

failure to properly consider the taxpayers' financial information in the record.

Because the record does not permit us to do so, a remand is appropriate.

A remand may also be appropriate when a taxpayer has experienced a

material change in circumstances between the time of the section 6330 hearing and

the trial that affects the RCP calculation. Leago v. Commissioner, T.C. Memo.

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[*36] 2012-39;Churchill v. Commissioner, T.C. Memo. 2011-182 (remanding to

the Appeals Office when the taxpayer's RCP had changed as a result of his

divorce); see INS v. Ventura, 537 U.S. 12, 14-18 (2002); SKF USA, Inc. v. United

States, 254 F.3d 1022, 1028 (Fed. Cir. 2001); Harrell v. Commissioner, T.C.

Memo. 2003-271 (remanding when a Supreme Court case decided after the notice

of determination resolved a relevant question about equitable tolling). Petitioners'

middle son passed away in August 2013 after the notice of determination was

issued. This tragic event constitutes a material change of circumstances for

petitioners, who had to take out a fifth section 401(k) plan account loan to pay his

final expenses and who are still unable to pay for the placement of his ashes in a

mausoleum. These additional costs could have affected petitioners' RCP and their

ability to pay their tax liability. On remand the Appeals Office is directed to

consider updated financial information that petitioners should provide to

document any change in their ability to pay resulting from their middle son's

death.

3. Special Circumstances

The IRS may accept an OIC on the basis of doubt as to collectibility when

the offer is less than the RCP if there are "special circumstances". Rev. Proc.

2003-71, sec. 4.02(2); see Fairlamb v. Commissioner, T.C. Memo. 2010-22. For

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[*37] this purpose, special circumstances are: (1) circumstances demonstrating

that the taxpayer would suffer economic hardship if the IRS were to collect from

him an amount equal to the RCP and (2) compelling public policy or equity

considerations that provide sufficient basis for compromise. See Murphy v.

Commissioner, 125 T.C. at 309; McClanahan v. Commissioner, T.C. Memo. 2008-

161; IRM pt. 5.8.4.2(4) (June 1, 2010) (stating that the factors establishing special

circumstances for doubt as to collectibility are the same as those considered under

effective tax administration); IRM pt. 5.8.11.2(2)(b) (Sept. 23, 2008). Factors

indicating economic hardship include, but are not limited to, (1) the taxpayer's

long-term illness, medical condition, or disability that renders him incapable of

earning a living, where it is "reasonably foreseeable that taxpayer's financial

resources will be exhausted providing for care and support during the course of

the condition"; (2) the taxpayer's monthly income is exhausted each month in

providing for care of dependents without other means of support; and (3) the

taxpayer is unable to borrow against the equity in assets and liquidation of those

assets to pay a tax liability would render the taxpayer unable to meet basic living

expenses. Sec. 301.7122-1(c)(3)(i), Proced. & Admin. Regs.; IRM pt.

5.8.11.2.1(6) (Sept. 23, 2008).

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[*38] Our analysis here closely tracks our analysis of petitioners' economic

hardship claim supra. The record does not show whether Settlement Officer

Degiovanni considered accepting petitioners' OIC on the basis of doubt as to

collectibility with special circumstances. See IRM pt. 5.8.11.4(2) (Sept. 23, 2008)

(instructing IRS employees to consider a taxpayer's OIC under doubt as to

collectibility with special circumstances when the taxpayer's RCP does not exceed

the tax liability and special circumstances exist). The notice of determination

states: "The IRS cannot compromise tax liabilities for less than the amount

determined to be reasonably collectible. Your Offer in Compromise was rejected."

Settlement Officer Degiovanni knew that Mrs. Gurule could not work because of

her neurological condition, and she also knew that Mr. Gurule had to take several

section 401(k) plan account loans to pay their son's medical expenses and other

basic living expenses. Even though Mr. Gurule had positive net realizable equity

in his section 401(k) plan account at that time, it was quickly being depleted to

pay basic expenses. Yet the notice of determination suggests that the Appeals

Office rejected petitioners' OIC pro forma because the offer fell below the

calculated RCP. We cannot determine whether the Appeals Office gave due

regard to potential special circumstances before rejecting the offer. See Anderson

v. Commssioner, T.C. Memo. 2013-261 (remanding when it was unclear whether

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[*39] the settlement officer properly considered the taxpayer's health in rejecting

the taxpayer's OIC with special circumstances); Leago v. Commissioner, T.C.

Memo. 2012-39 (same); see also Antioco v. Commissioner, T.C. Memo. 2013-35

(remanding when the settlement officer did not meaningfully consider the

taxpayer's special circumstances before rejecting her proposed installment

agreement).

IV. Conclusion

In the light of the inadequacy of the administrative record and the reasons

stated for rejecting petitioners' proposed collection alternatives, we are unable to

conclude whether it was an abuse of discretion for respondent to determine to

proceed with the proposed collection action for petitioners' 2009 tax liability.

Because a remand would be "helpful", "necessary", or "productive", see Kelby v.

Commissioner, 130 T.C. 79, 86 n.4 (2008); Lunsford v. Commissioner, 117 T.C.

183, 189 (2001); Churchill v. Commissioner, T.C. Memo. 2011-182, we will

remand the case to the Appeals Office for further consideration and clarification.

Upon remand the Appeals Office shall consider any additional information or

evidence that petitioners may wish to submit, any new collection alternative that

petitioners may wish to propose, and any asserted change in circumstances.

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[*40] We have considered the parties' remaining arguments and, to the extent not

discussed above, conclude that those arguments are irrelevant, moot, or without

merit. For the reasons identified above, we will remand this case to the Appeals

Office for further proceedings consistent with this opinion.

To reflect the foregoing,

An appropriate order will be issued.